2014 (12) TMI 758 - AT - Income Tax

Loan to be treated as deemed dividend u/s 2(22)(e) Loan paid to M/s. Ernst & Young Merchant Banking Services Pvt. Ltd. - Inter corporate deposits to be treated as loans or not - Substantial part of the business of the lending company is that of money lending or not Held that - The assessee took inter corporate deposits from its subsidiary company Ernst & Young Merchant Banking Services Pvt. Ltd. - assesses had offered it to tax initially but he claimed it as not taxable and therefore the matter has to examined on merits and to determine as to whether it is taxable under the Act - it is not taxable as decided in Utkarsh Fincap (P.) Ltd. Versus Income-tax Officer, Ward 8 (4) 2005 (11) TMI 167 - ITAT AHMEDABAD-A as held that interest on inter-corporate deposits are not chargeable to interest tax, as the deposits are in the nature of loan or advances - the main objects of the company was to carry on the business of merchant banking i.e. financing, which clearly reveals that the assessee is in the business of financing and once assessee is in the business of financing, the provisions of section 2(22)(e) of the Act will not apply to inter corporate deposits - the assessee has accepted inter corporate deposits from a sister concern and also assessee is engaged in the business of finance, as is clear from the objects mentioned in Memorandum of Association, the provisions of section 2(22)(e) of the Act will not apply to the facts of this case as the inter corporate deposits cannot be treated as loans or advances in terms of section 2(22)(e) of the Act Decided against revenue.

Summary

Issues Involved:
1. Whether the addition made by the Assessing Officer (AO) treating the loan as deemed dividend under section 2(22)(e) of the Income-tax Act, 1961 was justified.
2. Whether the business of the lending company qualifies as "substantial part of the business" under section 2(22)(e)(ii) of the Income-tax Act, 1961.

Detailed Analysis:

Issue 1: Addition as Deemed Dividend under Section 2(22)(e)
The primary issue in this appeal is the AO's addition of Rs. 69,60,262/- as deemed dividend under section 2(22)(e) of the Income-tax Act, 1961. The AO considered the inter-corporate deposits received by the assessee from its subsidiary, Ernst & Young Merchant Banking Services Pvt. Ltd. (EYMBSPL), as loans or advances, leading to the addition based on the accumulated profits of EYMBSPL. The assessee contested this addition, arguing that inter-corporate deposits are distinct from loans or advances and should not attract the provisions of section 2(22)(e). The CIT(A) deleted the addition, agreeing with the assessee's argument and referencing the legislative intent and judicial precedents, including the ITAT Kolkata decisions in similar cases.

Issue 2: Substantial Part of Business
The second issue is whether the lending company, EYMBSPL, engaged in money lending as a substantial part of its business. The CIT(A) and the Tribunal examined the business activities of EYMBSPL and found that a significant portion of its income (45.45% in the relevant year) and funds (82% of total funds) were derived from money lending activities. The Tribunal referred to the legislative language in section 2(22)(e)(ii), which exempts loans or advances made in the ordinary course of business where lending is a substantial part of the company's business. The Tribunal upheld the CIT(A)'s finding that EYMBSPL's money lending activities constituted a substantial part of its business, thus falling within the exception provided in section 2(22)(e)(ii).

Conclusion:
The Tribunal concluded that the AO's addition of Rs. 69,60,262/- as deemed dividend under section 2(22)(e) was not justified. It held that inter-corporate deposits are distinct from loans or advances and that EYMBSPL's money lending activities constituted a substantial part of its business, thus qualifying for the exception under section 2(22)(e)(ii). The appeal by the revenue was dismissed, and the order of the CIT(A) was upheld.